Decision turns class trusts and contributory mortgage schemes upside down for tax purposes

By Alexis Kokkinos - August 14, 2018

If you operate a class trust under the AMIT regime, or operate a contributory mortgage scheme, then the decision in Aussiegolfa Pty Ltd (Trustee) v Commissioner of Taxation [2018] may have significant ramifications for the way your Fund is treated for tax purposes.

How are such Class Trusts or Contributory Mortgage Schemes typically treated?

Many fund managers and trustees have historically treated class trusts and contributory mortgage schemes as a single trust. However, we have continued to express our concern that clauses in the trust deed can result in segregating the assets into separate trusts for the benefit of those selected unit holders. Accordingly, where this occurs, the trustee could technically be required to treat each separate trust as a separate tax entity.

What was the decision?

The Full Federal Court decision was in respect of the DomaCom Fund, which issued a specific class of units in a unit trust with respect to a certain asset (the Burwood Sub-Fund). The Court held that the Sub-Fund was to be treated as a separate trust for tax purposes.

Is the decision specific to the trust deed?

Yes, paragraph 147 of the decision clearly states that “while the Constitution allowed for the creation of a distinct trust with respect to each class of units, it is still necessary to consider, whether or not, with respect to a particular class of units, a distinct class was created.”

What issues were raised in the decision?

Under the trust deed in question, the Court noted that Clause 4.1(b) didn’t confer rights of unit holders to any particular asset. However, while this was the case, Clause 3.4(c) provided some very specific rules with respect to how assets, liabilities, proceeds, income and expenses on scheme assets were to be treated specifically for each class.

Furthermore, Clause 4.1(b) was also drafted to be “subject to the rights attaching to a Class of Units”. On the issue of the relevant class, the Supplementary Disclosure Document was accepted as outlining very specific rights for the relevant class with respect to the specific assets in question. The Court therefore stated the following:

149 When the provisions of the Constitution are considered together with the statements in the June 2015 Product Disclosure Statement and the Supplementary Product Disclosure Statement, one is left with the clear and unmistakable impression that there was an intention to create a distinct trust in association with the Burwood Sub-Fund units and that this intention was effective.

Does this decision apply to you?

Many of our clients have sought to obtain a taxation ruling on this issue and we have received numerous positive taxation rulings that each class is not treated as a separate trust. However, not all Funds have sought clarity on this issue. Furthermore, a lot of trust deeds have different clauses with respect to how classes of units are to be treated (and disclose different things in their disclosure documents).

What should you do?

If you are a trustee of, or a manager of, a Fund that is either an AMIT Class Trust or a contributory mortgage scheme and you have not received a taxation ruling on this issue, you should consider whether the Aussiegolfa has implications for the treatment of your Fund.

In particular, you should consider both the trust deed and the disclosure documents and whether the documents (together) would be seen to create a separate trust with respect to the assets of the Fund. Where this is the case, this may result in significant tax compliance ramifications for your Fund (e.g. inability to apply the AMIT regime, registration of each Sub-Fund, lodgement of separate tax returns, lodgement of a separate BAS for each Sub-Fund, etc). We can help you review your position and also work with you and your legal team to determine whether it is possible to modify your trust deed and disclosure documents to manage this issue going forward.

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